At this time Iwould like to welcome everyone to the ULTA Salon, Cosmetics& Fragrance, Inc. third quarter fiscal 2007 results conference call.(Operator Instructions) Itis now my pleasure to turn thefloor over to Allison Malkin of ICR. You may begin.

Allison Malkin

Thank you and good morning. Before we get started I’d like to remind you ofthe company’s Safe Harborlanguage, which I’m sure you’re all familiar with. The statements contained inthis conference call which are not historical facts may be deemed to constituteforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995. Actual future results may differ materially fromthose projected in such statements, due to a number of risks and uncertainties,all of which are described in the company’s filings with the SEC. With respectto each reference we make on this call, to adjusted net income per dilutedshare as a result of the IPO, a reconciliation of net income per share on aGAAP basis to adjusted net income per share has been provided in Exhibit 4 ofour earnings release which is available on our website and has been filed withthe SEC on Form 8-K. I’d like to turn the call over to ULTA’s President andCEO, Lyn Kirby.

Lyn Kirby

Thank you Allison, good morning everyone. Thank you for joining us todiscuss the company’s third quarter fiscal 2007 results. On the call with metoday is our Chief Financial Officer, Gregg Bodnar. Following my opening remarksGregg will review our financial highlights and then I will provide closingcomments and turn the call over to the operator so that we can answer thequestions you have for us today.

We are pleased tospeak with you today on our first quarterly conference call of thepublic company. As I told many of you on theroad show, UTLA hasbeen on an excitingjourney. For the pasteight years we have been repositioning thebrand, developing our infrastructure, developing our merchandising andmarketing strategies, while growing to 248 ULTAlocations across thecountry today. As aresult, today we are thecategory leader for beauty that we believe there is significant growth that liesahead. We want to thank you for your interest and believe theyears ahead will beequally rewarding.

The third quarter marked a successful period for our company. We delivered a25.4% increase in sales. We increased comp store sales by 6.7% and we grew netincome by 16.3%. The quarter also met with several noteworthy. Firstly, wecompleted a record number of store openings and remodels. To this end, weopened 26 new stores during the quarter. Our openings were well balanced with10 stores opened in major metro markets, 10 opened in medium sized markets, and6 in smaller markets. We added four new markets during the quarter withincluded Alabama, Ohio,Tennessee and Massachusetts.In addition, we complete seven full remodels in the third quarter and atquarter-end, operated 237 stores across 30 states.

We accomplished this despite incurring a very slight loss of budgeted weeksfor certain stores due to some permit developer issues in just a few locations.Overall though I am absolutely delighted with seamless ability of our team toopen this record number of stores and remodels in the quarter and furthermore,I am pleased with the results of our new stores. Our 2007 class is performingin line with our new store model. Next year our plans include a smoother newstore opening curve on a larger number of openings for the year. As a result,we anticipate the number of openings we achieve this quarter to represent apeak quarterly opening level for next year. Based on this quarter’s recordnumber of openings, we are very confident in delivering next year’s storeexpansion program.

For the fourth quarter, we have already opened 11 of 12 new stores with oneplanned store for January. Looking to 2008, our pipeline is full and 2009 isshaping up very nicely.

Our sales included strong comp store sales growth driven by both average ticketsas solid gains in customer traffic while our in-store experience continues todrive average tickets; our marketing continues to drive excitement and trafficto our stores. Integral to our marketing strategy is our database containing 6million loyalty club members representing a clear competitive advantage for ourcomp {inaudible]. During the quarter we added additional marketing targeted toour best customers which has proved very successful in the quarter. In additionwe worked with our brand partners to support this advertising investment. Wewill continue to flex our marketing muscle going into the holiday seasonfocused on strategies to deliver incremental traffic to the stores.

In addition to our marketing, we continued to drive growth around merchandisingstrategies. The Prestige category generated double digit comp growth in thequarter and in addition, we have continued to float fresh new products andbrands into our stores. During the quarter we introduced new brands such asDermalogica, Juicy Couture, Nick Chavez and Jessica Simpson Hairdo. As wediscussed on the road show, a cornerstone of ULTA is our salon business. Wecontinue to be pleased with the ongoing development of our salon strategieswhich are generating strong comp stores sales growth. This growth underscoresour continued focus, dedication and commitment to this business as a corecomponent of our competitive advantage.

Following quarter-end we did re launch the ULTA.com site. It is a bit laterthan we would have liked. The new ULTA.com was unveiled on November 16thand it is achieving a very good response rate for customers. As we begin fourthquarter, we are still working to optimize the customer experience on the newplatform yet we remain delighted by the improved features, functionality,efficiency and look of the site. Although we are late, we have alreadyexperienced days where transactions are significantly greater than last year’speak volume days. I certainly invite all of you to take a look and while it isunfortunate that we will not be able to harvest as much sales volume for thisyear, we do expect to fully maximize this platform in 2008.

As we ended the fourth quarter we realized that we are operating in a verydifficult environment however we believe we are well positioned. Our inventoryis in great shape. It’s fresher than last year and it’s in the right categoriesand brands. Our stores look terrific and we have a very loyal customer base onwhich to target our high impact marketing. All of this has us poised to maximizethe holiday season. We understand that the season may reach high promotionallevels across all aspects of retail and we are prepared for this. We will beprudent in the way we invest to drive sales for the goal towards maximizingprofitability. Nonetheless, we will flex our marketing muscle by offeringexciting enticements such our great bathrobe as part of the gift with purchaseon fragrance gift sets and in addition we have chosen to go deeper into ourloyal customer list exciting marketing offers and have achieved a veryfavorable response from these vehicles early in the quarter.

Again, we believe our strategies areprudent and balanced and have us positioned to achieve our fourth quarter salesand earnings targets. Coming out of theholiday season we will continue our Prestige brand expansion inthe month of Januarywith the rollout to alldoors of Stila Cosmetics which is currently being tested in30 of our stores. With that I would like to turn thecall over to Gregg to review our financial highlights inmore detail.

Gregg Bodnar

Thank you Lyn. As Lyn mentioned strong sales growth and a 210 basis pointincrease in gross profit margin more than offset increased expenses and drove a16.3% increase in third quarter net income.

Starting with the income statement and beginning with sales, for the thirdquarter net sales increased 25.4% to $208.2 million from $166.1 million lastyear. Sales growth was driven by a 6.7% increase in comparable store saleswhich follows a 15.6% increase in comparable store sales last year on arealigned calendar basis. Our comparable store sales were fueled by stronggrowth in customer transactions and a healthy increase in average ticket.Non-comp store sales contributed $17.3 million to total sales and total squarefootage increased by 27%.

As Lyn has mentioned, we opened a few stores and re launched the websitelater in the quarter than we originally had planned. This impacted total salesgrowth by approximately 2% in the quarter with no impact to net income. Importantlyall of our new stores scheduled for the holiday season are currently open andour store expansion plans include one store opening at the end of the fiscalyear in January.

Gross profit in the third quarter was $68.1 million or 32.7% of net sales ascompared to $50.7 million or 30.6% of net sales last year. The 210 basis pointincrease in gross profit margin was primarily attributable to an increase invendor advertising allowances offsetting increased advertising expense. Alsobenefiting gross profit was a decrease in the amount of accelerateddepreciation associated with store remodels, as compared to last year when theremodel program was launched. We do not expect these levels of improvement ingross margins to continue into the fourth quarter.

Pre-opening expenses were $4.5 million or 2.2% of net sales, compared to$2.9 million or 1.7% of net sales reflecting 26 new stores opening during thequarter as compared to 11 opened in the prior year. Pre-opening expenses werewell controlled. This was driven by extensive training and succession planningprogram which promotes new managers from within and we were able to gainmeaningful marketing leverage as we opened a record number of stores in thequarter. As a result, operating income increased 13.2% to $8 million or 3.8% ofnet sales from $7 million or 4.2% of net sales in the prior year. We werepleased to achieve this level of growth even after absorbing incremental costsassociated with stock compensation and pre-opening expenses related to our expandedstore opening program this quarter.

Interest expense totaled $1.3 million as compare to $1 million last year.This reflects a $33.5 million increase in average debt levels as compared tolast year primarily driven by new store investments. The effective tax rate forthe quarter was 36.9% as compared to 39.9% in the prior year. The decline inthe tax rate compared to last year reflects an adjustment to our effective statetax rate but had no material affect on EPS.

The resulting net income was $4.2 million as compared to $3.6 million lastyear representing an increase of 16.3%. On an adjusted basis excluding theimpact of the company’s preferred dividends in 2006 and 2007, income perdiluted share for the third quarter of fiscal 2007 was $0.08 as compared to$0.07 in the prior year third quarter.

For the first nine months, net sales rose 23.5% to $602.8 million withcomparable store sales increasing 7.4%. This follows a 13.7% increase incomparable store sales realigned for the 53rd week calendar shiftlast year. Operating income was $22.8 million as compared to $23.8 million. Thedecrease in operating income includes the impact of $2.8 million of warehousemanagement software implementation related costs, $1.9 million of incrementalaccelerated depreciation expense related to our store remodel program and $3.8million in additional pre-opening costs.

Adjusted income per diluted share which excludes the affect of our preferreddividends in 2006 and 2007 was $0.20 as compared to $0.23 last year.

Merchandise inventories at the end of the quarter were $219.5 millionreflecting a 62.7% increase compared to the third quarter last year.Approximately $42.7 million of the increase resulted from the addition of 49new stores opened since the end of the third quarter last year. In addition,approximately $15 million of the inventory increase relates to the calendarshift. This calendar shift causes each quarter of fiscal 2007 to begin and endone week later than the comparable prior year quarter. As a result the thirdquarter in fiscal 2007 ended one week closer to Christmas resulting inadditional $15 million of seasonal inventory as measured on an average perstore basis. Excluding the affects of the calendar shift, inventory at the endof the quarter on an average per store basis increased 3% compared to the prioryear quarter end. We are very pleased with both the level and composition ofour inventory as we enter the fourth quarter and the critical holiday season.

Regarding our outlook for the fourth quarter and the full year, for thefourth quarter of fiscal 2007 we estimate net sales in the range of $304million to $310 million as compared to $267 million last year. This assumescomparable store sales growth in the range of 46%, income per diluted share is forecastedin the range of $0.22 to $0.24 as compared to $0.19 last year, reflecting agrowth rate of 21% at the mid point of the guidance range. As a result for thefull year, we estimate net sales in the range of $907 million to $913 millionas compared to $755 million last year. This assumes comparable store salesgrowth of 6.2% to 6.9%, income per diluted share in the range of $0.47 to $0.49as compared to $0.45 last year. Our fourth quarter earnings guidance assumes aneffective tax rate of 40% and 60 million shares outstanding. For the full year,our earnings guidance assumes a tax rate of 39.8% and approximately 55.3million shares outstanding.

We project capital expenditures for the full year, which fund our new storeopening or remodels of approximately $115 million. We plan to open a total of53 stores and remodel 17 locations this year. A year-end we expect to operate249 stores, increasing square footage by 28% to approximately 2.6 millionsquare feet.

Our long-term growth targets on an annual basis include comparable storesales increase in the range of 3% to 5%, square footage expansion of 20% to 25%and net income growth of 25% to 30%.

I now would like to turn the call back over to Lyn.

Lyn Kirby

In summary, our priorities are focused on optimizing profitability andearnings during the holiday season. We remain excited by our long-termpotential given the power of our compelling in-store experience, brands andcategories, our marketing machine and most importantly the talent andmotivation of our team. This combination has us positioned for success in thefourth quarter and beyond in our efforts to expand ULTA to 1,000 U.S.locations over the next 10 years. With that I would like to turn the call overto the Operator to begin the Q&A portion of our call.

Question-and-Answer Session

Operator

Your first question comes from Neely Tamminga – Piper Jaffray.

Neely Tamminga – Piper Jaffray

Good morning and it looks like a nice quarter there. I just wanted to ask alittle bit more, if you could walk us through some of the brand introductionsfor next year, kind of what’s in test, what’s going to be rolled out, aboutwhat quarter. That would be helpful I think -- and you’ve got the Stila thingand maybe some other items on deck, but just kind of how should we be thinkingabout the rollout of some of these new brands into next year. Then I will havea follow-up question.

Lyn Kirby

Neely, we’re not really getting into detail on 2008 on the call. Wecertainly have a continued roster of new brands that we will both test androll. As you may recall our goal is to have one rolling and one testing in eachsix month time period. We are on track to do that. We do have a couple of otherbrands lined up for test next year while we’re rolling Stila. But getting morespecific than that would not be the right place to be while we’re still workingout the negotiations for the brands that we’re testing. But rest assured we dohave a full roster of exciting brands to roll with.

Neely Tamminga – Piper Jaffray

Lyn, would these be, the one rolling and the one testing, are theycomparable in terms of size you know, or is it kind of testing a two-footerwhile you’re rolling out a four-footer. I’m just trying to get a sense of themagnitude.

Lyn Kirby

Sure, no the brands that we are discussing and working with are of the sizeand magnitude of the Stila, if that’s helpful for a perspective for you Neely.

Neely Tamminga – Piper Jaffray

Very much so thank you and then just one follow-up question for me, Gregg,the D&A you might have given it on the call, I’m not particularly sure, Iknow you talked about the accelerated depreciation and amortization, can yougive us what D&A was at the end of Q3 and what you expect it to be at theend of this year?

Gregg Bodnar

Yes, for Q3 Neely it was $9.5 million and then for the full year we expectit to be approximately $40 million.

Neely Tamminga – Piper Jaffray

Thank you so much. Good luck.

Lyn Kirby

Thanks Neely.

Operator

Your next question comes from the line of Brian Atonic – J.P. Morgan.

Brian Atonic – J.P. Morgan

Good morning Gregg. I guess my two questions for Gregg are first maybe youcan update us on your IT or DC plans for first quarter or first half, maybejust give us sort of the time table, what we should be watching there. And thensecondly Gregg, it seems like the Q4 sales are coming in a little differentthan we had thought, but the earnings are coming in exactly where we thought.So just maybe help us out there, what’s happening on the sales line and whereyou’re making it up in earnings?

Gregg Bodnar

Yeah Brian, we’ll take that in three steps, DC and IT and then Lyn will talkabout Q4 sales and then I’ll finish it with the earnings impact. As it relatesto distribution centers, we talked to a lot of folks that we saw over the road showperiod. The distribution center is a key focus for us; we’ve already convertedthe technology side of it, as you may remember us talking about in the firsthalf of 2007. We are focused completely on the infrastructure side of thedevelopment. We still remain very focused on launching that new distributioncenter at the end of the first quarter and we are on track to do that.

As it relates to IT in the first half and first quarter of the year, otherthan bringing up the new distribution center which does have some network costsand impact associated with it, we’ll primarily be focused on rolling out apoint-of-sale upgrade, which I think we’ve mentioned before. We’ve put that alltogether and then basically put it on the shelf for the fourth quarter to getthrough the holiday period and then we’ll be rolling it out into Januarybeginning of February.

Lyn Kirby

As it relates to thebrand, comp is coming inas we expected. We’re on track there. Thedifference to what we had expected, as I had mentioned theecommerce site; alittle later than what we had originally hoped for interms of getting that launch up. That’s having about a$5 million to $6 million impact on total sales volume, although as you wouldexpect, not quite somuch on earnings, but Gregg will touch on that. And asmall shortfall interms of our forecast on asmall number of new stores as they go into thequarter. We had forecast some of thestores above model sowe are still veryhappy with the overallperformance of the classof 2007, but that is on arelatively small number of stores versus what we had forecast inthe budget.

Gregg Bodnar

So Brian, newstores performance continue to remain on track with our model as itwas in thethird quarter and then as we were entering thethird quarter, and then looking towards thefourth quarter, we just took some prudent measures on expenses, mostly inSG&A. Just to make sure that we were completely focused on deliveringearnings when we saw alittle bit of sales shortfall coming from thedot com site and theconversion on the dotcom site wouldn’t have been thestore contribution in anyway. But we pulled back expenses there just to make sure that we could manage ano-impact conversion on earnings from that sales shortfall. We’ve done thesame thing in theretail and corporate office, just prudent expense management.

Brian Atonic – J.P. Morgan

And if I could just follow-up on those comments from Lyn, is there anythingin specific that those couple of stores fell short of your maybe aggressiveplan but was it a region of the country? Was it something that you could maybepoint out that we should be thinking about as we go into ’08?

Lyn Kirby

No, not really, more than anything else it represented us going a littleearly into some trade areas that are still ramping and we thought that we couldbe a little bit further down the track in terms of the model. We fully expectthat they will get back on track as the trade areas continue to fill out. So,no nothing significant, nothing geographic, Brian, some were just a reflectionof that.

Brian Atonic – J.P. Morgan

Okay, terrific, good luck for holiday.

Lyn Kirby

Thanks very much.

Operator

Your next question comes from theline of Lynn Walther – Wachovia.

Lynn Walther – Wachovia

A couple of questions, can you give us a little bit more color on yourcommentary for holiday? Are you seeing something that is causing for you – justbeing conservative and just to clarify, in your guidance, are you planning tobe a little bit more promotional than last year given the environment?

Lyn Kirby

Certainly we saw the, what I would describe as a rather choppy environmentin third quarter, and going into fourth quarter I think the choppiness hasturned to just a little bit more volatility. Both the economy and consumerconfidence and of course just the calendar shift that causes the sales to comecloser to the last week of Christmas then it does in a traditional holidayseason. So both of those factors are what certainly have us very prudentlymanaging the expenses as Gregg described, as well as a very detailed oversighton our merchandising and marketing. The biggest shift that we have going on isnot so much increased promotional activities, so much as going deeper into our listwith our customer club members. In third quarter we focused more on gettingadditional trips out of our best customers. In fourth quarter we feel that thebiggest incremental opportunity is getting some of our customers that come inless frequently to come in more frequently and that’s where we’ve focused mostof our marketing efforts.

Lynn Walther – Wachovia

Okay thanks, that’s helpful. When you add abrand like Dermalogica or Stila, how much cannibalization is there or doyou see you’reattracting a newcustomer, is there away to measure what happens when you bring out abrand like this? And does itdisplay something else or is there room inthe store to add it?

Lyn Kirby

The bigpicture perspective is itdefinitely adds to thestore totality no question. There’s usually some modest cannibalization inthe short-term ascustomers tend to try thenew brand but we see thebrand stabilize back atthe end, theones that are cannibalized;often we do seecustomers buying from both of thebrands. I think theoverall picture though is very that themore brands that we put into thestore, the greater we areas a destination forbeauty purchases for customers and totality and sowhat we see is anexpansion of total customer traffic and I believe acquisition of new customersto the brand ULTAas we add brands to thestable.

Lynn Walther – Wachovia

Okay, great thanks. Good luck for holiday.

Lyn Kirby

Thanks.

Operator

Your next question comes from the line of Lauren Levitan – Cowen &Company.

Lauren Levitan – Cowen & Company

Morning, Lyn I was hoping you could talk a little bit on the comment youmade regarding the challenging environment. Does that have any implications onproduct trends? I know you called out double digit comps and Prestige andcontinued comp growth in salon, so maybe help us understand how thatchallenging environment is impacting the actual consumer behavior in the storein terms of what they’re buying, maybe size of basket, composition of basket,thank you.

Lyn Kirby

As you know Lauren, we’re not going to comment on individual categoryperformance so I’m going to try to answer your question in some broad strokeswithout being too specific. I think what we are most closely watching is justoverall traffic to the store as opposed to category mix and shift. There iscertainly a lot of competition for the customer share of wallet from allretailers, not just retailers in the beauty sector. There is a lot ofpromotional activity going on. So we’re far more cognizant of that issue andbeing competitive in the total marketplace, then we are necessarily cognizantof individual shifts within the categories. We are not seeing any significantshift within that from what we would expect to see. Maybe just a little, theonly thing that I would even comment on, and I do believe this will come late,as the customer patterns shift close to the holiday season we tend to see fragrancecome a little bit later. We have watched this in other years. Specifically whenwe go back and look at our trend seven years ago, same calendar as this year,we certainly saw fragrance come a little late and we fully expect that it willcome late.

Lauren Levitan – Cowen & Company

That’s helpful. Gregg you also called out that there was an extra mailer inQ3 given the calendar shift, can we assume that that comes out of Q4 and if so,what implications does that have on how we should be thinking about operatingexpenses in the fourth quarter.

Gregg Bodnar

Laurie, it actually comes out of all the way back to the beginning of theyear. It comes out at Q1.

Lauren Levitan – Cowen & Company

So Q4, we’re a comparable number to last year?

Gregg Bodnar

Q4 we’re a comparable number to last year on a 13-week basis.

Lauren Levitan – Cowen & Company

But we’re against 14 weeks, so it is still the same number, 13 versus 14weeks?

Gregg Bodnar

Yes.

Lauren Levitan – Cowen & Company

Okay, thank you and good luck for holiday.

Operator

Your next question comes from theline of Daniel Hofkin – William Blair.

Daniel Hofkin – William Blair

Quick question regarding the adjusting for the vendor sponsorship and theimpact on operating expenses, if you could just maybe quantify a little bitmore what those two line items might have looked like excluding that transferand then just elaborating on the last response, within in the mix, are youseeing any shift, I understand it’s pretty much in line with your expectations,but any shift along the good, better, best toward maybe some of the moreopening or mass price points and brands in this more competitive environment,more uncertain consumer environment, thank you.

Gregg Bodnar

We’re not breaking down gross margins specifically, but what I would say isthat the increase in vendor-supported allowances related to advertising was prettymuch a one-for-one offset between gross margin and SG&A.

Daniel Hofkin – William Blair

Right.

Lyn Kirby

And as we continue with our marketing efforts in fourth quarter and again,certainly more difficult with counting the back half year and the first half,we will continue with that same strategy in fourth quarter of working with ourvendor partners to supplement the increased marketing that we will do goingdeeper into our list.

Daniel Hofkin – William Blair

And the reason that you wouldn’t expect to see a similar kind of, if youwill, trade-off between those items in the fourth quarter as similar magnitudeas the third quarter, is that just expected to be a smaller amount, or what’sthe dynamic there that you’re looking for?

Gregg Bodnar

The bigger driver in the third quarter was the calendar shift as opposed tothe incremental marketing. So that calendar shift doesn’t occur in the fourthquarter. It’s really to advertising vehicles compared to last year.

Daniel Hofkin – William Blair

Okay, thank you. Sorry, with regard to the just general comment onpurchasing patterns, obviously not quantifying specific categories, but justgenerally good, better, best.

Lyn Kirby

We’re really not seeing a shift other than ones that we have specificallydriven ourselves. We have been very cognizant of wanting to make sure thatthere were traffic drivers in our marketing mix, so we have put offers in thatare stocking stuffers as an example we have going right now. In the store, ifyou were to go in there, where you’re able to buy five small stocking stufferitems for $10 and get a free Christmas bag to put it in. So we have createdoffers like that to ensure the traffic coming into the store but other thanthat, where we have decided, we’re not seeing any significant shift or pricepoint shift versus last year at this point.

Daniel Hofkin – William Blair

That’s helpful, thank you very much.

Operator

Your next question comes from the line of [Herschel Ellison – Strivel &Company Inc.]

[Herschel Ellison – Strivel &Company Inc.]

If I were to pick up a newspaper and read a headline and it said something, said“boy is that really gonna upset ULTA” what might that headline say?

Lyn Kirby

One more time, I’m sorry I…

[Herschel Ellison – Strivel &Company Inc.]

If I pick up a newspaper, and I read a headline and I said, “Boy thatheadline’s really going to upset the people at ULTA.” What might that headlinesay? What’s your big fear?

Lyn Kirby

My big fear is that we get snow storms on Christmas Eve. There is noquestion that this Christmas, the last five days of this holiday season as areflection, not of the economy but purely the calendar shift, the businesscomes very late because we had that last weekend in here. But that would be mybiggest fear.

[Herschel Ellison – Strivel &Company Inc.]

Thank you.

Lyn Kirby

You’re welcomed.

Operator

Your next question comes from the line of Linda McDonald – ManchesterManagement.

Linda McDonald – Manchester Management

I had a hard time following the line on the gross margin in the thirdquarter, that was a nice improvement that you saw and what you’re expecting forthe fourth quarter gross margin year over year.

Gregg Bodnar

Yeah, there were two big drivers in gross margin in the third quarter. Oneas I mentioned which was the more significant piece related to the incrementalvendor funding of our advertising expense, which was primarily related to theshift in advertising in the third quarter from the first quarter as compared tolast year. And then the reason why we don’t expect that to continue in thefourth quarter or the magnitude, because it was mostly driven by this calendarshift and now we’re on a comparable calendar in terms of our advertisingvehicles compared to the fourth quarter of last year. So we won’t see increasein gross margin because we won’t have the incremental advertising that’s fundedby the vendors.

Linda McDonald – Manchester Management

Okay, is there any way for you to quantify what the gross margin would havebeen without that shift?

Gregg Bodnar

You know we don’t break out vendor allowances separately and decompose ourgross margin, so I’m sorry, we won’t do that.

Linda McDonald – Manchester Management

Okay. Do you have any guidance for the fourth quarter for the gross margin,should we assume sort of a similar trend to the previous couple of quarterswhich was flat, just slightly down?

Gregg Bodnar

I would expect a similar trend to last year.

Linda McDonald – Manchester Management

Okay, and how about a little bit of guidance just on pre-opening costs perstore, as you said in this quarter you got some really nice leverage foropening a lot of stores, I think you said on the advertising front, what’s sortof a good number to look for for pre-opening per store when you’re openingabout 10 to 15 stores?

Gregg Bodnar

As we look to the fourth quarter, we’ve got 12 new stores to open plus wehave three remodels, so total of 15 projects and we would expect for those 15projects that pre-opening costs would be about $3 million or about $200,000 perstore on average.

Linda McDonald – Manchester Management

Okay great, thanks very much, I appreciate it.

Operator

Your final question comes from the line of Liz Dunn – Thomas WeiselPartners.

Liz Dunn – Thomas Weisel Partners

Morning, my first question is for Lyn. You obviously have significantexperience, can you talk about your perception of how this category beauty,performs in a downturn in the business cycle versus something like apparel.Then my second question relates to pre-opening expense, it came in a little bitbetter than we expected, lower than we expected. Could you discuss that Greggin a bit more detail and will those benefits be ongoing?

Lyn Kirby

In terms of the category versus apparel, we are subject to the whims ofweather is it relates to traffic coming into our stores, so hence my ChristmasEve comment, but we are not subject to the whims of the weather gods as itrelates to product purchasing patterns. So we have certainly been moreresilient when we see weather like this. In terms of the economy itself, theeconomic conditions, the category has always performed very well in a softereconomy. There’s a logic for it in terms of a woman being prepared to forego somepart of her purchasing patterns, but not being willing to let go of her shampoobecause she does have to wash her hair. She does have to go to work so she doesneed to wear lipstick. I think the behavior is simply that this category is anecessity for her in many instances and not just a luxury purchase. Theexperience to purchase is an indulgent luxury experience, but the category is obviouslynot a luxury category. So I think we will see some real resilience as we havehistorically in a soft economy.

And of course the other big advantage in an economy like this for ourcategory versus apparel that we don’t have the markdowns that apparel merchantshave to deal with when there is the softness in the economy or strange weatherpatterns. A lot of our inventory is good, basic inventory. We see a lift inbasic at this time of year, obviously for example in the fragrance category, sothere is no markdown there related to our basic. If for some reason the trafficdoesn’t generate quite the way we expect, some of our seasonal purchasing doeshave return-to-vendor rights so we do have that opportunity in terms ofmanaging our inventory and our promotional goods that we purchase for theholiday season, again, has a slightly longer life than I think you will seewith apparel, that apparel merchants have. So the category, the buying patternI think is more resilient and our markdown strategies are easier to manage thanthe apparel merchants.

Gregg Bodnar

Liz, on pre-opening costs based on what you heard me just describe for thefourth quarter, we’re going to end 2007 at about $175,000 average per store.That is slightly below where we expected our model to be. I would say inquarters where we have a similar alignment, where we have this level of volume,we will see some efficiency so I do expect there’s going to be some quarters in2008 that will be slightly under that average of $200,000 per store. Again,most of it driven by, as we get better at building the pipeline for new storesand the general management structure for those stores and our store basebecomes larger, it gives us a better group of managers to be able to float theminto those new stores, which allows us to be much more planful in doing that.Also it allows us to train them on a shorter time period because they’reexisting store management. And then on the advertizing costs, to the extentthat we can get some economies producing our unique grand opening one and grandopening two tabs for those stores, as we have more stores clustered into a particularquarter, we’re going to still continue to see some efficiency.

Liz Dunn – Thomas Weisel Partners

Thank you and congratulations.

Gregg Bodnar

Thank you.

Lyn Kirby

Thanks very much everybody and again thank you very much for joining us onour first earnings call as a public company. I would like to take theopportunity to wish all of you a happy and healthy holiday and new year and welook forward to speaking with you next year. Thank you.

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